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When Government ministers become ex-ministers – and then ex-MPs – they are able to speak their minds on the issues of the day

Addressing an audience of pension providers, employment benefit consultants and actuaries at a recent pensions industry trade conference, where he was billed as ‘Steve Webb: Uncensored’, the longest running pensions minister of recent years and architect of the pensions freedoms had this to say.

On the upcoming Budget he described the proposal to reduce the Lifetime allowance to £1m as “ridiculous” but the “even more ridiculous plan”, he said, is the proposal that for earners of £150,000 to £200,010 the annual tax relief allowance will be brought down from £40,000 to £10,000. “The more you think about that the messier it sounds” he said.

Explaining his thinking, he pointed out that given HMRC will only be able to confirm an individual’s earnings once their annual tax return is completed, assuming the policy is implemented for the 2016/2017 tax year, then it will be post 31 January 2018 that HMRC will have processed the return. “They then decide that in 2016/2017 that I’ve earned too much to get the 40% personal allowance so only then do they take it away and I face a penal tax charge. But maybe I can carry forward some of the annual allowance from the year before or bring it back from the year ahead, but we don’t know what it is for the year ahead because my income hasn’t been set.” This will be legislation that will require review and change further down the line, he predicted.

Lack of pensions representation in Commons

Talking about pensions legislation over the next five years, Webb expressed concern that whereas in the Coalition Government Department for Work and Pensions (DWP) ministers sat in the House of Commons, now both the Government’s Pension Minister, Baroness Ros Altmann and the Shadow Minister for Pensions, Labour peer Keith Bradley, will sit in the House of Lords.

He pointed out that while the Government has a majority in the Commons that is not so in the House of Lords. “The Lords is where change will happen,” he said.

The second consequence of DWP ministers sitting in the Lords he stressed, “is that by convention the Lords don’t legislate on taxation. So the pension tax relief debate will happen solely in the Commons when there is no DWP pensions minister.”

Pension freedoms

On pension freedoms, he said he’d been “struck by the low volumes of pensions taken out since April. The Chancellor announced that £1bn had been taken out in 60,000 pots – if you do the math that is an average of £17,000 per pot. In the good traditional British way people haven’t gone mad. It’s also a reminder that the median pension pot used to buy an annuity is £20,000,” he said.

In respect of the recent campaigns by national newspapers over people getting money out of their pensions and being charged exit fees, he suggested he had some sympathy with pension providers. “By and large the exit fees were there all along – they haven’t been invented since April,” he said. “And providers are not required to offer the pension freedoms, they are only required to allow someone to move their money to a provider who would.

“What’s happened is that the public phoned their provider in January and the provider said come back in April. So the public feel they have been waiting months whereas the reality is they have only been able to [use the pension freedoms] for a few months.

“There is a public perception that providers are being awkward but the providers have been told by people like me to flag PensionWise and to encourage people to go for guidance. So while I don’t entirely sympathise with providers, you do know they are slightly caught in the middle – government wants them to take protective measures and the consumer wants them to get on with things.”

Auto enrolment

The success of auto enrolment (AE) to date, Webb said, required further action in this Parliament if people weren’t to look back and say “we did everything you told us to do and we’ve got a poor standard of living in retirement”.

In five years time he said he hoped that the 10 million people enrolled in AE would have largely stayed in and he predicted that there would be a lower and broader charge cap, which would include fund management transaction costs.

Where the Government needed to act now was in the area of contributions, he stressed. Currently the statutory minimum is 1% paid in by the employee and 1% by the employer. In October 2018 that will chance to 3% and 5% respectively.

“Eight percent is not enough for most people,” Webb said. It would need to be increased. “But my experience of Government is that it takes a long time to get things changed. If the Government doesn’t start thinking now about how it gets beyond 8% then it won’t happen in this parliament. I can guarantee you that. Then we’re losing another five years. AE has been a real success but if we auto enrol all these people and then don’t put enough money in it’s not going to deliver the pension outcome that we want,” he said.

Pension freedoms had made pension saving popular, he said, with a knock on effect for auto enrolment because “when we come to re-enroll people into AE in three years, the hardest people to get to stay in, the older workers are more likely to stay in because instead of [a pension] being a product where your money’s locked up and you have to buy an annuity, it’s now that pot of money with tax relief with an employer contribution that you can spend pretty much as you want to and that’s a very different proposition.”

Pot Follows Member

Questioned from the audience on whether pot follows member (PFM) would go ahead and when, Webb said, while nothing was guaranteed, the primary legislation is in and the launch is planned for autumn 2016.

“Small pots that auto enrolment creates are like shrapnel across the pensions landscape.

Very soon there will be tens of millions of small pots and something has to be done,” he said. The only viable options he suggested were lost pots being housed in a “supertrust somewhere” or PFM.

The attraction of PFM, he said, “was that if over time people build up a big fat pot with the employer they are currently with that means workplace engagement gets much more effective and much more interesting. If most of someone’s pots are sitting outside of their current workplace pension – with a company they probably never chose or had a relationship with – so all they have is a small pot with their current firm, the employer isn’t going to waste its time on workplace pension engagement” he said because the pension holder is less likely to be engaged. “So, I would rather keep the money with [the individual] and keep it active.”

Come autumn 2016, he said, the plan is to start with biggest 20 providers, covering 90% of market, with an opt-in not opt-out “just to get things started”. “Once you’ve got the infrastructure in place, the pensions registers, etc, you can build on the infrastructure, and pensions passports become possible. I’m quite excited about the prospect.”

However, with Webb’s successor Baroness Ros Altmann an open critic of PFM, there is no guarantee it will be introduced next year, despite legislation being in place.